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Tuesday, September 20, 2011

The free falling shilling

The first time President mwai Kibaki talked about the free fall of the shilling was at the opening bell of the NSE when Brish American commenced trading on the NSE about two weeks ago.

The IPo was undersubscribed, and one reason for that, stock-brokers say is a shilling that won't hold stready as well as Inflation which has robbed Kenyans of disposable income, and the stock exchange is the last of their priorities.

The president talked about a dollar demand that was insatiable, and called on the IMF to quicken the process of the Extended credit facility that Kenya had signed up for earlier this year.

let me break that down: The Extended Credit Facility (ECF) is an IMF facility which provides financial assistance to low income countries with protraced balance of payments. This means that the import- export balance is off tangent, and it usually results in a weak local currency among other economic challenges.

So when Kibaki asked for the a hastening of the ECF, he was basically asking for an injection of dollars into Kenya. Sometimes it can also catalyse additional foreign aid.

So where did all the dollars go?

The problem with the ECF route is the signal it sends. Kibaki's is a distress call. When there's such high demand for dollars , it means there's not enough coming in, usually through proper routes such as investment. But by saying this, Kibaki is admitting, albeit indirectly, that no one's bringing in investment.

That, and that perhaps a Central Bank that has been sleeping on the job. The same monetary policies that have been praised for stabilizing the local unit in the past, is the very same one that is now on the spotlight for letting it weaken. Is it rigidity to work with the times, or a loose abandon in the sense that markets will create a path for the shilling to settle.

3 comments:

It's such a shame that the government machinery is always on a fire-fighting mode. There are quite a number of inter-twining factors playing down the steadiness of the shilling...let me not go into the nitty gritties of it.But hey...Nice piece.